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Moody's cites weak sales, slashes May debt rating

Moody's Investors Service, one of the big three corporate credit rating agencies, cut its rating on May Department Stores debt, citing weakening same-store sales over a two-year period.

And the retailer's ratings could be lowered even further, Moody's warned, if sales don't improve soon, or if the company allows margins to deteriorate, pursuing higher sales with lower prices.

Moody's downgraded the retailer's senior unsecured debt to "Baa1" from "A2," and its commercial paper to "Prime-2" from "Prime-1." The move affects about $5.6 billion in May debt.

"The downgrade reflects the negative impact on debt protection measures from predominately negative comparable store sales for the last 24 months as competition from other retail formats, apparel price deflation, a slower economy and sated apparel appetites have challenged the company's ability to grow sales and profitability," said Moody's.

The agency added, "Like many other full-line department stores, May has experienced anemic or negative comparable store sales for several years. The improving apparel merchandise at discounters has appealed to low-end customers during a slow economy, and the good value proposition and easy shopping experience offered by the expanding Kohl's concept have intensified the challenges to building profitable sales in the department store segment."

As if that weren't enough, Moody's took aim at lackluster merchandising. "The company's private-label merchandise and national assortments may be resonating less with consumers than the offerings of other department store retailers."

And its wide geographic reach has also worked against the retailer, said Moody's. "It has absorbed the competitive impact of non-traditional retailers earlier and in more markets than some other department stores."

On a more positive note, Moody's said May has battled back "with the introduction of new private brands, especially those targeting under-served and younger consumers. The company has edited national assortments, and is re-establishing Lord & Taylor as an upscale retailer of fashion and style." A growing bridal business should provide another lift. And some capital spending is "appropriately being devoted to a better shopping experience." But, Moody's cautions, "While these initiatives are likely to be successful, it could take time for lapsed and new consumers to learn about and appreciate them."

Offsetting some of the bad news, said Moody's, and supporting a relatively strong rating, even given the recent cut, "The growth of May's sales and profitability have given the company one of the highest profit margins in the industry. Strong operating cash flow in fiscal 2002 allowed debt to be reduced, although cash flow to debt metrics weakened." May's ownership of its receivables and most of its stores are credit positives. The company's capital structure is conservative, with the largest current portion of long-term debt over the next 34 years at a manageable $260 million.

The ratings outlook, said the agency, remains stable, "based on Moody's belief that May's solid cash-flow generation, efficient operations, conservative capital structure and efforts to improve merchandising and the shopping experience should preserve debt protection measure even in an unforgiving retail environment."

An upgrade in May's credit rating "would require a sustained and sustainable improvement in comparable store sales, market shares in major trade areas and credit metrics." And on the down side, "Ratings could be lowered in the intermediate term, if margins are sacrificed to grow revenues, or if May makes a significant debt-financed acquisition."

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